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FICO analysis finds disturbing trends in consumer credit behavior

Feb 23, 2010

FICO, a provider of analytics and decision management technology, has announced new and troubling findings uncovered in the latest analysis offered by its subscription service for businesses, FICO Score Trends. Reversing a long historic trend, mortgage default risk for consumers with high FICO scores now exceeds their credit card default risk, even though most credit cards are unsecured credit and mortgages are secured by real estate. The company observed a parallel rise in mortgage delinquencies for higher-scoring U.S. consumers. According to the analysis in FICO Score Trends, recent repayment behavior across the financial services industry has shifted significantly from historical trends. In 2008-2009, bankcard accounts were just 1.6 times more likely to become 90 days delinquent than were mortgage loans. By comparison, in 2005 bankcard accounts were more than three times more likely to become 90 days delinquent. And for borrowers scoring high on the FICO(R) score's 300-850 score range, the level of repayment risk actually has become greater for real estate loans than for bankcards. In 2009, 0.3 percent of consumers with FICO scores between 760-789 defaulted on real estate loans, compared to 0.1 percent who defaulted on bankcards. "We're identifying lending industry situations in FICO Score Trends that to our knowledge have never been seen before," said Dr. Mark Greene, chief executive officer of FICO. "Economic instability is creating unknown risk in lenders' credit portfolios as well as counter-intuitive trends in consumer behavior. While the FICO 8 score continues to prove its unprecedented power in rank-ordering consumers for risk, even low-risk consumers are changing the value they give different credit lines. As the CARD Act goes into effect next week, it likely will create additional, unhelpful pressures on the banking business." In FICO Score Trends, company experts found new evidence that lenders tightened their criteria for new loans in 2008-2009 and began "cherry picking" the kinds of borrowers to whom they would extend credit. Mortgage loans opened last year between April and October reflected significantly tighter standards than in prior years. In 2005, nearly 46 percent of consumers who opened a new mortgage had a FICO score less than 700. In 2008 this percentage had dropped to just 25 percent of the newly booked mortgage population. Other industry sectors experienced similar shifts. In the bankcard sector in 2005, 51 percent of consumers with a new credit card had FICO scores less than 700. That percentage dropped to just 38 percent in 2008. As lenders tightened their credit standards, it became correspondingly more difficult for consumers with delinquencies in their credit histories and lower FICO scores to qualify for additional credit. FICO also examined FICO Score Trends to learn how credit risk of real estate loans and bankcards varied across U.S. regions. The company found the most dramatic shift in the Pacific region. In 2005, bankcards were 6.4 times more likely to default than were mortgage loans. That percentage dropped to only 1.3 times riskier in 2009. Consumers in the Midwest region demonstrated the smallest relative change. Bankcards were 2.5 times more risky of default than were mortgages in 2005, but bankcards were just 1.5 times more risky of default by 2009. Borrowers in the Northeast continue to present the least amount of default risk nationally for real estate loans. These observations were taken from FICO Score Trends, the subscription service that provides lenders with unique access to industry FICO score trends indexed by a range of criteria such as industry, geography and time period. Lenders regularly use FICO Score Trends to benchmark their own portfolios and trends in order to improve their risk management and forecasting. For more information, visit www.fico.com.
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